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Summary of "History of Economic Thought"
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Summary of the book History of Economic Thought by Landreth and Colander for the course Theorists of Economic Growth.
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Summary “The History of Economic Thought”by Landreth and Colander
Chapter 1
When we consider economics as an intellectual discipline, it is still relatively young. Before 1500,
no groups were concerned exclusively with understanding economics. Some historical events, like
the Great Depression, changed the concerns of economics from practical policy and business affairs
to analysis of the operation of an economy, which has significantly influenced the development of
economic theory. The graduate school is important in determining an economist’s mindset, and
publishing is important to an economist’s success. So the content of graduate courses and the
decisions of economics journals greatly influence the direction of economic thinking. The
methodology of science moved into the 20th century with the development of logical positivism,
which provided the scientific method with philosophical foundations. It established a working
methodology expressing the empirical and nonempirical, or rational aspects. When it’s linked with
deductive reasoning a positivist desire is to let the facts speak for themselves. It originated with a
group known as the Vienna Circle, and it argues that scientists develop a deductive structure (a
logical theory) that leads to empirically testable propositions. It’s accepted as true only after is has
been empirically tested and verified by scientists.
The methodology of science has since progressively removed itself from that view. The first
departure resulted from a concern about the verification aspect of logical positivism. Popper argued
that the empirical tests do not establish the truth of a theory but only its falsity – which is why it’s
called falsificationism. It’s never possible to verify a theory, since one cannot perform all possible
tests of the theory. When you test a theory and it in fact does occur, it only means the theory has
not yet been proved false. According to Popper, the goal of science should be to develop theories
with empirically testable hypotheses and then to try to falsify them, discarding those that prove
false. The reigning theory will be the one that explains the widest range of empirical observation
and that has not yet been falsified.
However, falsificationism has several problems. First, empirical predications of some theories
cannot be tested because the technology does not exist. Second, it’s difficult to determine when a
theory has or has not been falsified (by exogenous factors). A third problem arises from the
mindset of researchers, who may fail to test the implications of an established theory, assuming
them to be true. Therefore, Thomas Kuhn moved away from this and introduced the concept of the
paradigm – a given approach and body of knowledge built into researchers’ analyses that
conforms to the accepted textbook representation of mainstream scientific thought at any given
time. Most scientific work is normal science, in which researchers try to solve puzzles posed within
the framework of the existing paradigm. This work often leads to the discovery of anomalies that
the paradigm fails to account for, but the existence of such anomalies is not sufficient to overthrow
the reigning paradigm – only an alternative paradigm that is better able to deal with the anomalies
can do so. In revolutionary science, first the existing paradigm is rejected by part of the scientific
community, and then the old and the new paradigms begin to compete and communication
between researchers in the opposing camps becomes difficult. If the revolution is successful, a new
normal science will be developed. So whereas in Popper’s view truth will win out, in Kuhn’s view a
superior theory might exist but not be adopted because of the inertia favouring the existing
paradigm. The reigning theory is therefore not necessarily the best.
Paul Feyerabend argues that the acceptance of any method limits creativity in problem solving and
that the best science is therefore to be confined to no method. The rhetorical and sociological
approaches do not vision truth as absolute. The rhetorical approach to methodology emphasizes
the persuasiveness of language, contending that a theory may be accepted not because it’s
inherently true but because its advocate succeed in convincing others of its value by means of their
superior rhetoric. The sociological approach examines the social and institutional constraints
influencing the acceptability of a theory (like funding, jobs, and control of the journals).
But methodology is not going to end here. A postrhetorical methodology will probably combine
insights such as Feyerabend’s with more workable approaches and emphasize abduction rather
than deduction or induction. The difference will be in perspective: postrhetorical economists will be
more sceptical of their knowledge and less likely to dismiss an arguments as false before they have
closely considered it and more likely to “let 1000 flowers bloom.” Furthermore, they will be much
, more likely to follow Bayesian, rather than classical statistics. Bayesians believe one can discover
higher or lower degrees of truth in statements, but not ultimate truth. In the methodology of the
future, information about the researcher as well as the research will probably be a necessary
component of statistical reporting. Methodology accounts for many of the differences among
economists. Formalists are more likely to use a logical positivists or falsificationist methodology;
nonformalists are more likely to use a sociological or rhetorical approach.
Chapter 3
Mercantilism was the work of merchant businessman between 1500 and 1750. The literature they
produced focused on questions of economic policy and was usually related to a particular interest
the merchant-writer was trying to promote. For this reason, there was often scepticism regarding
the arguments and validity of their conclusions. Every person was its own economist and tended to
concentrate on one topic. Mercantilism can be best understood as an intellectual reaction to the
problems of the times. In this period of the decline of the manor and the rise of the nation-state,
the mercantilists tried to determine the best policies for promoting the power and wealth of the
nation. They proceeded on the assumption that the total wealth of the world was fixed. The gain of
one was necessarily the loss of another – so they emphasized international trade as a means of
increasing the wealth and power of a nation; in order to achieve a so-called favourable balance of
trade. The goal of economic activity was production – not consumption; so increasing exports and
holding down domestic consumption, so poverty for the individual benefits the nation. A central
feature of mercantilism is its conviction that monetary factors, rather than real factors, are the
chief determinants of economic activity and growth. Mercantilists maintained that an adequate
supply of money is particularly essential to the growth of trade. Changes in the quantity of money
generate changes in the level of output. All of this would change with the advent of Smith and
other classical economics, which would contend that the level of economic activity and its rate of
growth depend upon a number of real factors; the quantity of labor, natural resources, capital
goods, and the institutional infrastructure. Changes in the quantity of money would only influence
the general price level.
Physiocracy began around 1750 – their writings express remarkably consistent views on all major
points, because 1) it developed exclusively in France, 2) the ideas were presented over a relatively
short period of time and 3) physiocracy had an acknowledged intellectual leader named Quesnay
whose ideas were accepted virtually without question. Economic theory was a prerequisite of
economic policy; their unique idea concerned the role of natural law in the formulation of policy.
They maintained that natural laws governed the operation of the economy and that, although these
laws were independent of human will, human could objectively discover them – as they could the
laws of the natural sciences. The major concern of the physiocrats was within the macroeconomic
process of development. They focused not on money, but on the real forces leading to economic
development. They studied the creation of physical value and concluded that the origin of wealth
was in agriculture or nature. Labor, according to them, could produce only enough goods to pay
the costs of labor, and the same held true for the other factors of production (they were ‘sterile’),
with the exception of land. Therefore, production from land created the surplus that the physiocrats
called the net product. They lived in an era where the productivity of the industry was not
apparent. Land rent was the measure of the society’s net product. The tableau economique
represents a bold, creative conception of the inter-relatedness of macro-economic sectors
(landowners, farmers and artisans) with great simplicity. The physiocrats considered this economic
table to be their theoretical achievement, because it gave a crude representation of 1) the flow of
money incomes between the various sectors of the economy, 2) the creation and annual circulation
of the net product throughout the economy.
They believed that the basic motivation for the economic activities of human beings was the desire
to maximize gain. Prices were formed in the market by economic activity; and the formation of
these prices could be studied, because it was governed by natural laws independent of human will.
They concluded that free competition led to the best price and that society would benefit if
individuals followed their self-interest. They conceived of the economy as largely self-regulating
and thus rejected the controls imposed by the mercantilist system. The government should leave
things alone – laissez faire. The burden of taxes would ultimately rest on land. The mercantilists
had found the source of the net product to be exchange – particular in the form of international
trade – and therefore advocated policies designed to foster a favourable trade balance. The
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